GENERAL PRINCIPLES OF FORMATION OF THE BUDGET:
- We must learn to spend as much as we earn.
The size of public debt of Ukraine is critical – only to service it will cost Ukraine 111 billion hryvnias in 2017. Therefore, budget revenues should be formed on the basis of realistic forecasts, not optimistic expectations.
- For people to be protected the state must be effective.
The country, which is in a state of war, cannot afford to use resources inefficiently. In the first place, efficiency is about defining the target expenditures; then clear calculation of the expenditures; and consequently – the measurable result.
– Expenditures must be measured by the final goal, which will assess the effectiveness at the end of the fiscal year (period).
– Expenditures must have a detailed estimate, not abstract formulations (“basic research”, “increase of the defence capability of the state”).
– The draft budget must contain measurable indicators which will indicate achievement of the goals.
- 2017 should become the year of fundamental reform of public institutions. The budget should contain separate programs on reforming all authorities with a detailed estimate of the reforms.
The growth of spending on government institutions cannot be higher than the growth of budget revenues. The key principle in the formation of budgets of ministries and agencies should be optimization of functions, transparency and accountability of expenditures, and introduction of e-governance. The latter will automatically accelerate the decision-making procedures and minimize corruption.
Civil servants’ salaries should be increased by means of optimization of functions.
– Newly established state institutions (State Bureau of Investigation, New Supreme Court and others);
– The security and defence sector.
- The growth of spending on social protection, health care and education cannot be lower than the growth of budget revenues.
- Proposals: HOW TO INCREASE REVENUES
1.1 Assessment of the revenue side of the budget should be realistic.
It is necessary to take as a basis the pessimistic forecast of the Ministry of Economic Development, approved by the Cabinet of Ministers, in which the GDP growth is expected at a rate of 1.5%. The presently proposed forecast of GDP growth in 2017 is at the level of 3%, which will only be possible through inflation and devaluation of the hryvnia, or due to increased production. Since the growth of production up to this level should not be expected, it looks like inflation and devaluation of the hryvnia are actually factored into the budget.
While forming the revenue side of the budget, one cannot take into account the revenues that cannot be guaranteed, such as privatization (17 billion hryvnias) and special confiscation (10.5 billion hryvnias). If we do receive this money, the Government may allocate it for energy efficiency, social security, or defence capability.
At the same time, privatization of public enterprises can be carried out only on the basis of a new transparent procedure. Privatization must be preceded by the introduction of the corporate principles of management of public enterprises and reform of the State Property Fund and establishment of its accountability to the Parliament.
1.2 Collection and administration of taxes, as well as customs work should be transparent.
Customs must be reformed; for this end there must be costs provided, among other things for the purchase of technical equipment (scanners, scales), software for prompt verification of information (reference prices), etc. At the same time, in the revenue side of the budget the revenue from the customs reform should be taken into account. According to the Prime Minister himself, the customs can increase the revenues by 24-50 billion hryvnias.
For the trade of imported goods which require warranty service (household appliances, electronics, mobile devices, computers, etc.), it is necessary to introduce the mandatory use of payment transactions recorders. At the same time, it is necessary to introduce responsibility for publishing information about counterfeit and contraband goods on the Internet. This will reduce the abuse and corruption at the customs and will bring several billion hryvnias to the budget.
To do this, we need to optimize the structure and functions of fiscal services, eliminate the tax police and micromanagement in tax administration. To this end, the State Fiscal Service should change its philosophy of working with entrepreneurs. It should be a customer oriented consulting service, not a body that exercises micromanagement defining who has to pay how much taxes. A prerequisite for the reform should be the dismissal of Mr. Nasirov from the post of Chairman of the State Fiscal Service and a new public competition for the position.
1.3 Transparency of the land lease should be a prerequisite for the introduction of the land market.
It is necessary to introduce a minimum social tax liability per hectare at a level of 1-2% of the value of monetary valuation of the land, which will make 200-400 hryvnias per hectare. This will give the budget 4-5 billion hryvnias, and will bring out of shadow 25-30% of the leased lands, which today are not officially registered. We recommend to send these additional resources to support horticulture, vegetable growing and cattle breeding, and to provide these farmers with the special VAT regime.
PROPOSAL: HOW TO MAKE EXPENDITURES EFFECTIVE
2.1 In order to make the army stronger, the expenditures of the security and defence sector should be controlled by the people.
The security and defense sector will remain one of the priorities for funding for decades. During the period from 2014 till the end of 2016 Ukrainians have spent 125 billion hryvnias of budget funds on the security and defence sector, without taking into account the money that the people collected themselves to help the army. The budget for 2017 allocates another 64 billion to the Ministry of Defence, so the overall expenditures will amount to 190 billion hryvnias. At the same time, these are volunteers who have been providing the Armed Forces of Ukraine with all the necessary things; no combat brigade has modern equipment, and the weapons are outdated.
Now the Parliament does not know how and on what the Ministry of Defence spends the money, it does not know either how the funds will be spent in 2017. It is therefore necessary to introduce an effective mechanism of civilian control over the security and defence sector, in particular:
– The Ministry of Defence shall provide a detailed report on the expenditures for 2014-2016, a report on the defence order in 2014-2016, and a detailed estimate of costs for 2017, as well as provide public access to this information;
– In 2017, to conduct an independent audit of the property of the Ministry of Defence, an audit of the actual maintenance and structure of the Armed Forces of Ukraine;
– In 2017, to conduct an independent audit of “Ukroboronprom” state enterprise and to create an open system of management of public enterprises in the defence and security sector;
– The manager of all the funds allocated to the sector of defence and security should be exclusively the Ministry of Defence, because no other government agency has the competence for the efficient use of these funds.
2.2 People will be able to get more support from the state, when the system of social payments is more effective
It is necessary to introduce a single register of individuals which has to combine all the databases into one, with the right of certain authorities to have access to its parts. To do this, the necessary budget funds should be allocated.
Today in Ukraine there are more than 100 registries and databases which contain information about the citizens. These databases are not synchronized with each other, which creates possibilities for abuse and significantly increases the administrative and support costs (software, servers, services).
Introduction of a unified register of individuals should be a prerequisite for the Pension Fund reform and creation of a unified register of social benefits. In 2017, Government’s spending on pensions will amount to 156 billion hryvnias, and more than 50 billion will be paid as subsidies.
The Ministry of Finance estimates that the state can lose up to 60 billion hryvnias per year on the social benefits through various schemes. The scams are possible due to the fact that the mechanism for the provision of social services – subsidy payments, pensions, etc. – in Ukraine is decentralized and exposed to micromanagement. To date, there is no single database of the recipients of these services.
It is necessary to develop a unified database of recipients of social benefits (within the register of individuals). For this purpose it is necessary:
– To conduct an audit of the Pension Fund, Fund of compulsory state insurance; verify the recipients of social benefits, incentives, subsidies and the like;
– To provide in the budget 2017 the development of a single database of citizens and recipients of social benefits;
– To optimize the structure of the Pension Fund and the other managers of social benefits;
– To monetize all social payments and benefits and start paying social benefits directly from the state budget through state banks by the end of 2017.
It is absolutely impermissible to continue the taxation of pensions of working pensioners. The rule of applying the coefficient of 0.85 to such pensions must be canceled, and pensions must be paid in full.
2.3. We must strengthen the communities, instead of robbing them sneakily.
It is necessary to provide additional subventions for utilities at the expense of additional subsidies from the state budget to local budgets (15 billion hryvnias.) In 2017, communal payments of healthcare and education institutions is supposed to be carried out by the local authorities, which is why the overall development budgets of cities can be reduced by more than half. It kills the very idea of decentralization and strong communities.
We need to increase the education and healthcare subventions, which remained almost at the level of 2016, at least proportional to the increase of revenues to the state budget in 2017. The quality of education and healthcare is a matter of national security. Given the unprecedented terrible situation with the provision of schools, kindergartens, and medical institutions with the necessary, reduction of educational and medical subventions is inadmissible.
All administrative fees for local services should remain in the communities in the amount of not less than 80%.
Additionally, it is necessary to ensure in the state budget for 2017 the costs on the development of emergency medical services and establishment of operational dispatch services in regions by providing the appropriate software and allocate the relevant funding in the budget. This will ensure coordination of ambulance vehicles and will let them come to the patients more quickly. Establishment of operational and dispatch services require additional funding from the state budget for 2017 in the amount of 392 million hryvnias.
Allocating money from the State Budget of Ukraine for 2017 for mountain settlements and those that are located at an altitude above 600 meters above sea level, we should apply the rate of increase 1.5 for the estimated amount of subsidy from the state budget, and thus amend the Decree №435 of the Cabinet of Ministers of Ukraine from June 26, 2015. In all districts and towns classified as mountain ones the situation with the financing of educational and medical institutions is critical. The reason for this is that the relevant legal acts of the Cabinet of Ministers of Ukraine do not take into account the number of demographic, administrative and territorial aspects and specifics of the mountainous areas.
2.4. Energy efficiency and energy independence are the guarantee of the state’s independence.
Ensuring energy efficiency and energy independence requires significant investment by the state. This can significantly reduce the utilities costs, and can let Ukraine be independent from Russia’s energy.
To do this, we need to allocate money to the Fund for Regional Development (8 billion hryvnias) to improve the energy efficiency of public institutions, educational and medical institutions. In order to ensure a transparent system of expenses and evaluation of the efficiency it is necessary to develop a detailed estimate of costs at the level of regions/cities/objects, as well as estimate the figures of reducing the energy consumption and reducing the costs of utility bills.
We also need to support people at the expense of the Energy Efficiency Fund (800 million hryvnias) by providing concessional lending to the poorest segments of the population for their improvement of the energy efficiency of their housing.
2.5 It is necessary to stop building up repressive functions of the state and start caring about justice and human rights.
We must stop restoration of the police state and increasing of costs for law enforcement by means of increasing spending on state agencies and their eliminated functions. It is unacceptable to increase funding of the Ministry of Internal Affairs by nearly 1 billion for its maintaining. Unjustified is the increase of expenditures by 1.5 billion for the Prosecutor’s Office, whose investigative functions have been eliminated and whose staff is supposed to be 30% redundant.
It is also inadmissible to discredit the judicial reform through unjustified expenditures on the judiciary. We need to show a clear cost structure and provide for transitional periods of transformation of the judicial system, namely:
– The costs for the new Supreme Court, which should be established by March 30, 2017, might increase 10 times. This is inadequate even upon the condition there will be all the 200 judges from the very beginning.
– At least illogical is the growth of spending on the High Administrative, High Economic, High Specialized Court for Civil and Criminal Cases, which are going to be eliminated in 2017, in connection with the establishment of the new Supreme Court.